Copper: All China, all the time

Chinese imports for July were 291,000 tonnes, up 14% year-over-year. That was the fourth consecutive monthly increase and the highest level since last September. Moreover, the storied inventories sitting in bonded warehouses – which according to some accounts reached close to 1 million tonnes early this year – has been whittled down. One analyst says that the stockpile has fallen to 300,000 tonnes. If this is accurate, it would mean that the imported copper is being used for industrial purposes, rather than just being locked up in financing deals.

Exchange warehouse data also indicate a tightening market. Chart 2 shows that combined inventories at LME, Shanghai, and COMEX warehouses have fallen substantially over the past two months.

Another bullish factor for copper – of a longer-term nature – is rising production costs. Costs vary from region to region, but declining ore grades in the major mining centers, in addition to rising labor costs and higher energy costs everywhere, mean more expensive extraction. A case in point is Chile. The country produces about one third of the world’s copper. The Chilean state-owned mining company Codelco, which alone accounts for about 11% of global output, reported on Aug. 30 that cash production costs for the first half of 2013 were $1.71 per pound. That’s up from $1.47 in the first half of 2012.

On the bearish side of the equation, production has been strong, and without the single bullish factor of Chinese demand – large as it may be – surpluses will continue to expand. Chilean output has been down year-over-year in only one month this year – in April, by a modest 1.2%. For July, the most recent month for which data are available, output was an up an extraordinary 16.3% year-over-year. That brought year-to-date output to a gain of about 6.5%. That’s in line with early expectations, but still a very robust number.

In conclusion, it is a single-issue bull market. If Chinese imports were to back off again, there would be precious little to keep prices from collapsing. Still, history has shown that the Chinese phenomenon, for this and many other commodities, can last for sustained periods of time.

We advise using the recent setback in prices to cover short positions. This would replace our current protective stop of $3.45 per pound, basis nearest contract.